Factors to Consider: Lease or Purchase of a Facility

Once you start your small business, you must consider leasing or buying commercial space. Whether you lease or purchase commercial property, you gain use of the asset. The main advantage of a commercial lease is that your initial cash outlay is lower. However, purchasing commercial real estate gives you the benefits of property ownership.

Business owners should consider their options carefully when deciding between leasing or buying. There are financial, business, and zoning issues to consider before signing a lease agreement or a mortgage. Consider consulting a business attorney to review your options.

We make business formation EASY. Click here to start your free LLC.

Leasing vs. Purchasing Overview

One way to decide the right avenue is through a cash flow analysis. This provides you with an estimate of the amount of cash you would need to set aside to cover the after-tax costs of each alternative. Your cash-flow analysis should include operating expenses, probable rent increases, and moving costs. You may need to purchase additional inventory or materials for your move.

Depending on the type of lease, your monthly rent may be less than a mortgage payment. Be sure you know what type of lease agreement you have before signing. In a gross lease, the landlord pays for maintenance, taxes, and insurance. In a net lease, the tenant pays for any or all of these costs.

Also, keep in mind the end of the lease. Renters must return the property to the way they entered it. You may need to remove all the fixtures and improvements you made during your occupancy at your cost or convince the landlord to keep them since they improve the property value and cost them nothing. If you own the property, all improvements benefit your business.

Factors Favoring Leasing

• Initial outlay: Under a lease, the initial cost will be the security deposit and two months’ rent. A purchase will require a down payment of 10% or more.
• Monthly payments: Under a gross lease, the landlord is responsible for maintenance, property taxes, and insurance. This keeps your rent payments regular.
• Cash flow: With regular lease payments, a startup has time to develop a stable cash flow and customer base.
• Credit rating: If the company has not established a credit rating sufficient to support a mortgage, leasing is preferable to using the owners’ credit to obtain a business loan.
• Flexibility: A short-term lease allows a small business to expand as necessary. Long-term leases provide opportunities for lease-term negotiations.
• Tax Savings: Rent is deductible as a business expense.

Factors Favoring Purchasing

• Real estate value: Purchasing property is almost always better than leasing. The tax benefits are greater, and other deductions can offset the monthly mortgage.
• Location: Location can be the most important factor for certain types of businesses. If you’ve found the perfect location for your business and established the business there, purchasing the property will ensure the business will not have to move.
• Control: When you own your property, you may renovate or repair it as you choose. You can lease out some or all of the space as income property. Some entrepreneurs purchase more office space than they need with the intention of leasing part to help with mortgage payments.
• Equity: Once you have property, you have something to borrow against. Lenders will extend credit to small business owners who own their own office space more readily than to those who lease.
• Tax savings: Depreciation on the property over time may bring you tax savings. In addition, if the property is financed, interest-based deductions are available.

Hire a Seasoned Business and Commercial Law Attorney

When you are considering whether to buy or lease, you should speak with a knowledgeable business and commercial law attorney. A lawyer in your area can help you make the best decision for your small business.

For more information, see FindLaw’s Business Operations section.